In today’s world, credit cards have become an essential financial tool that offers convenience and flexibility. However, obtaining a credit card can be challenging for individuals with a limited credit history or a low credit score. By leveraging your fixed deposit as collateral, these credit cards offer an excellent opportunity to build or rebuild your credit history while enjoying the benefits of a credit card. In this article, we will explore the benefits of credit cards against fixed deposits, their features, eligibility criteria and how they can be a valuable financial tool.
Understanding Credit Cards Against Fixed Deposits
Credit cards against fixed deposits, also known as secured credit cards, work on the principle of collateral. In this arrangement, you deposit a certain amount of money in a fixed deposit account with the issuing bank, and the bank extends a credit card with a credit limit typically ranging from 70% to 90% of the fixed deposit amount. The fixed deposit acts as security, protecting the bank from any potential default on credit card payments.
What are the Benefits of Credit Cards Against Fixed Deposits?
- Easy Approval
One of the significant advantages of credit cards against fixed deposits is that they are relatively easy to obtain. Since the fixed deposit serves as collateral, the issuing bank faces less risk in extending credit to individuals with limited credit history or poor credit scores. This makes these cards accessible to a wider range of individuals, including students, first-time cardholders, and those rebuilding their credit.
- Building or Rebuilding Credit
Credit cards against fixed deposits provide an excellent opportunity to build or rebuild your credit history. Regular and timely payments on your credit card can help establish a positive credit history, which is crucial for future financial endeavours. By demonstrating responsible credit card usage, you can gradually improve your credit score and increase your chances of obtaining unsecured credit in the future.
- Competitive Interest Rates
Since credit cards against fixed deposits are secured by your own funds, they often come with lower interest rates compared to regular credit cards. This can help you save money on interest charges, especially if you need to carry a balance on your card. Additionally, some credit cards against fixed deposits offer interest on the fixed deposit amount, providing a dual benefit of credit and savings.
- Credit Limit Flexibility
The credit limit on credit cards against fixed deposits is typically determined by a certain percentage of the fixed deposit amount. This gives you the flexibility to choose a credit limit that suits your needs and financial capabilities. As your fixed deposit grows over time, you may even be eligible for a higher credit limit on your credit card.
- Rewards and Perks
Credit cards against fixed deposits often come with rewards programs and additional perks similar to regular credit cards. These rewards can include cashback offers, reward points, discounts on shopping, dining, or travel, and various insurance coverage. By using your credit card responsibly, you can take advantage of these benefits and enhance your overall financial experience.
What are Some Key Features of a Credit Card Against a Fixed Deposit?
- Collateral Requirement: To apply for a credit card against a fixed deposit, the applicant is required to open a fixed deposit account with the issuing bank. The fixed deposit serves as collateral for the credit card and acts as security for the bank in case of default on credit card payments.
- Credit Limit: The credit limit on a credit card against a fixed deposit is usually a percentage of the fixed deposit amount. It typically ranges from 70% to 90% of the deposit. For example, if the fixed deposit is Rs. 10,000, the credit limit on the card may be around Rs. 7,000 to Rs. 9,000. The credit limit is determined by the bank’s policy and may vary.
- Interest Rates: Since the credit card against fixed deposit is secured by the deposit itself, the interest rates on these cards are generally lower compared to regular unsecured credit cards. The interest rates can vary from bank to bank, so it’s important to compare and choose a card with favourable rates.
- Credit Card Fees: Like any other credit card, credit cards against fixed deposits may have certain fees associated with them. These fees can include an annual fee, a joining fee, and transaction fees. It’s important to review the fee structure of the card before applying to understand the costs involved.
- Credit Card Benefits: Credit cards against fixed deposits often come with various benefits and features similar to regular credit cards. These benefits can include rewards programs, cashback offers, discounts on shopping or dining, travel benefits, and insurance coverage.
What are the Eligibility Criteria to apply for a Credit Card Against a Fixed Deposit?
- Age Requirement: Generally, the applicant should be of legal age, which is usually 18 years or above, to apply for a credit card against a fixed deposit.
- Minimum Fixed Deposit Amount: The applicant needs to have a sufficient amount of money to open a fixed deposit account with the bank. The minimum deposit requirement varies from bank to bank and usually ranges from Rs.10,000 to Rs.20,000.
- Documentation Requirement: The applicant will be required to provide the necessary identification and address proof documents, such as a valid passport, driver’s license, utility bills, and income proof, as per the bank’s requirements.
- Credit History: While credit cards against fixed deposits are suitable for individuals with limited or no credit history, some banks may still check the applicant’s credit history to determine eligibility. However, a poor credit score may not necessarily disqualify the applicant from obtaining this type of credit card.
Credit cards against fixed deposits offer a valuable opportunity for individuals to access credit, build or rebuild their credit history, and enjoy the benefits of a credit card. With easy approval, competitive interest rates, flexible credit limits, and rewards programs, these cards provide a gateway to financial stability and a stepping stone towards unsecured credit.